Originally created 07/23/02

Nothing wrong with your checkbook that black-ink magic can't fix



WASHINGTON -- Harriet Homeowner's personal finances are a mess and she wants that swanky new car. Out of luck? Not necessarily. She could always try some corporate sleight of hand.

She could hand out business cards and claim these potential clients are as good as money in her bank account.

She could shuffle that bothersome credit card bill around until it appears to be a long-term investment - something with value - instead of an in-your-face drain on the checking account.

She could send fruit baskets to friends and claim them as sales. That might help her books look good enough to get her the big loan, even if it is fraud.

Suddenly, night is day. Expenses are revenue. Red ink is black ink.

Poof.

Such tricks are right out of corporate ledgers. The vaunted inventiveness of American business extends beyond the products it makes; it has been cutting edge with creative bookkeeping, too. A gathering wave of reform from Congress is trying to control that.

Down at Harriet's level, the lesson from corporate America seems to be there is nothing wrong with your checkbook that black-ink magic cannot fix.

How about buying encyclopedias for Junior and counting his future earnings as a genius?

Or, deciding to take a $10,000 vacation, then deciding not to, and considering yourself $10,000 richer as a result?

America Online executives did not convert business cards to cash, exactly. They did something in a similar vein before federal regulators called them on it.

For several years, AOL counted the free-trial subscription disks it sends pell-mell through the mail as assets, regulators said, as if some recipients were already signed up and paying.

The disks are also available free in bins in department stores. Youngsters take them by the handful and put them on their walls because they are shiny. Many disks never see the inside of a computer.

Fruit baskets are compliments of Centennial Technologies, a Boston-area computer card manufacturer.

Along with inventing sales of a nonexistent product, executives sent fruit baskets to friends of chief executive officer Emmanuel Pinez and recorded the shipments as $2 million in revenue. Pinez was sentenced to five years in prison and fined $150 million in 2000.

Shenanigans have gotten so out of hand that the Securities and Exchange Commission is requiring hundreds of companies reporting on their finances to swear they really, really mean it.

It recently began ordering the chief executive and chief financial officers of the 945 largest publicly traded companies to "personally certify - in writing, under oath and for publication - that their most recent reports filed with the commission are both complete and accurate."

The commission delicately noted in its order there have been irregularities of late at some large and "seemingly well-regarded" companies.

Among the irregularities: the shifting of operating expenses into capital accounts by a variety of companies. WorldCom had to restate its results by nearly $4 billion after its chief financial officer did that.

No exact parallel exists in Harriet's world, but it is like counting grocery money as if it were a long-term debt, such as a mortgage. It makes her daily cash flow look much better.

She may want that car loan, but in corporate America a prime incentive for faking profits is to make stock prices go up. Executives can get very rich cashing out their stock options, as happened at Enron.

Not all the accounting devices are illegal. Some are just illogical.

Federal Reserve Chairman Alan Greenspan says people will continue to get a warped picture of corporate finances until more companies start treating stock options as a business expense.

Doing so means more bad news in the ledger.

In AOL's case, the company paid a $3.5 million fine in 2000 without admitting wrongdoing.

Counting the disks and certain other advertising expenses as assets enabled the company to report profits for most of two years. Otherwise it would have shown losses. Poof.

-Worldcom, the second largest long-distance telephone carrier, disguised nearly $4 billion of expenses as capital expenditures to appear more profitable. With that shuffle exposed, the company is close to bankruptcy.

-Centennial Technologies, a computer-card maker in Waltham, Mass., invented sales of a nonexistent product and created false sales records by shipping fruit baskets to the CEO's friends. The fraud drove stock to $55.50 a share, plunging to $3 when it was exposed, costing investors millions.

-The cable company Adelphia Communications fired its auditor over questionable business arrangements that allowed founder John J. Rigas and his family to use corporate accounts for their personal business pursuits and amass up to $3 billion in debt.

-Telecommunications giant Global Crossing Ltd. and its top executives were charged with deceptive accounting, with founder and chairman Gary Winnick cashing out $734 million in stock before the company crashed.

-Tyco International Ltd., a Bermuda-based conglomerate, filed a lawsuit accusing its former general counsel of taking an interest-free $10 million loan from the company without the board's approval and using it to buy a resort home.

-AOL Time Warner converted legal disputes into advertising deals, shifted revenue from one division to another and sold ads on behalf of eBay and booked them as its own revenue, among other irregularities, The Washington Post reported last week shortly before the company announced an executive shuffle. The company said the accounting practices were appropriate. In earlier years AOL counted its mass-mailed free-trial subscription disks as assets.



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